The European Commission, in its Action Plan of June 2015, advocated a step-by- step approach to the C(C)CTB. First, after the implementation of a mandatory rule for CCTB39construction, only then, in a second step, should the full CCCTB40be introduced. The CCTB proposal is consistent with other Union policies and falls within the ambit of Article 115 of the Treaty on the Functioning of the EU. Further, it does not restrict Member State’s sovereignty to determine their desired amount of tax revenues in order to meet their budgetary policy targets, and it does not affect Member State’s right to set their own corporate tax rates. The CCTB proposal sets only unified rules for tax base construction and anti-avoidance rules to combat aggressive tax planning. Hence, companies still have to determine a corporate tax obligation and file a separate tax return in all Member States where they have a taxable presence. The following section will focus only on the basic rules and provisions that are the key elements of the CCTB proposal.
The determination of tax base is set in Article 7–10 as revenues less exempt revenues, deductible expenses and other deductible items. Thus, the tax base is designed very broadly. Taxable revenues will be reduced by following exempt revenuesclassified in Article 8 of the CCTB proposal as follows:
• subsidies directly link to the acquisition, construction or improvement of fixed assets that are subject to depreciation
38Their application within the EU is described in Sect.6.2.
39Proposal for Council Directive on a Common Corporate Tax Base, COM(2016) 685 final, at 25 October, 2016.
40Proposal for Council Directive on a Common Consolidated Corporate Tax Base, COM(2016) 683 final, at 25 October 2016.
• proceeds from the disposal of pooled assets
• proceeds from the disposal of shares, provided that the taxpayer has maintained a minimum holding of 10% of capital or 10% of the voting rights during the 12 months preceding the disposal
• proceeds from received profit distributions, provided that the taxpayer has maintained a minimum holding of 10% of capital or 10% of the voting rights for 12 consecutive months
• income of a permanent establishment received by the taxpayer in the residence state.
Expensesare deductible only to the extent that they are incurred in the direct business interest of the taxpayer, such as all costs of sales and all expenses, net of deductible value added tax, including costs for research and development, gifts and donations to charitable bodies and costs incurred in raising equity or debt for the purposes of the business.
To support innovation in the economy, the CCTB proposal introduces asuper- deduction for R&D.41According to Article 9, R&D costs will be fully expensed in the year incurred (with the exception of the situation, when immovable property was purchased or produced). Further, the taxpayer may also deduct, per tax year, additional extra-deduction for R&D, particularly with respect to the following:
• 25% of R&D costs—if R&D costs reach EUR 20 million, the taxpayer may deduct 25% of the exceeding amount
• 50% of the R&D costs—for R&D costs up to EUR 20 million, each tax year, the taxpayer may deduct 50% of the R&D costs incurred in that year, excluding cost related to movable tangible fixed assets
• 100% the R&D costs—for R&D costs up to EUR 20 million, the taxpayer may take an extra super-deduction of 100% of R&D provided that taxpayer meets all of the following conditions:
– is an unlisted enterprise – has fewer than 50 employees
– has an annual turnover and/or annual balance sheet total not exceeding EUR 10 million
– has not been registered for longer than 5 years – has not been formed through a merger – does not have any associated enterprises.
41R&D is defined in Article 4(11) CCTB proposal as basic research (experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any particular application or use in view), applied research (original investigation undertaken in order to acquire new knowledge but directed primarily towards a specific, practical aim or objective) and experimental development (systematic work, drawing on knowledge gained from research and practical experience and producing additional knowledge, which is directed to producing new products or processes or to improving existing products or processes.
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This provision is aimed at SMEs, small and innovative entrepreneurship and small start-up enterprises to support the key policy initiatives relating to the functioning of the Single Market. Further, it is considered to be one of the motivations for entering into the CCTB system.
Other deductible items cover the depreciation of fixed assets referred to in Articles 30 and 40 of the CCTB proposal, which can be individually depreciated or depreciated together in one asset pool at an annual rate of 25% of the depreciated base.42
The CCTB proposal also definesnon-deductible items43in Article 12, including the following:
1. profit distributions and repayments of equity or debt 2. 50% of entertainment costs
3. the transfer of retained earnings to a reserve that forms part of the equity of the company
4. corporate tax and similar taxes on profits 5. bribes and other illegal payments
6. fines and penalties, including charges for late payment
7. expenses incurred by a company for the purpose of deriving income that is exempt
8. gifts and donations other than those referred to in Article 9(4)
9. acquisition or construction costs or costs connected with the improvement of fixed assets that are deductible
10. losses incurred by a permanent establishment in a third country.
Having in mind that the most attractive part represented by the consolidation scheme is missing in the first step, the CCTB proposal introduces cross-border loss offsetting, which should eliminate the current distortion of Internal Market as only 7 Member States allow cross-border loss relief. The provision allowing cross- border loss reliefis mentioned in Article 42 of the CCTB proposal. On this basis, losses incurred by an immediate or lower-tier subsidiary (i.e., in which the parent company holds more than 50% of the voting rights and has an ownership right amounting to more than 75% of the subsidiary’s capital or owns more than 75% of the rights giving entitlement to profit—so-called qualifying subsidiary) or perma- nent establishment situated in other Member States may be carried forward and deducted in subsequent tax years. Further, Articles 42 and 43 stipulate conditions where it is possible to make a cross-border loss relief:
• a reduction of the tax base as a result of considering losses from previous tax years shall not result in a negative amount
42For more details see Article 33 and 37 of CCTB proposal.
43For more details see Article 12 of CCTB proposal.
• a resident taxpayer has to first deduct its own losses and then losses incurred by its immediate qualifying subsidiaries or by permanent establishment(s) situated in other Member States
• the oldest losses shall be deducted first
• no cascade effect is allowed
• loss relief shall be in proportion to the holding of the resident taxpayer in its qualifying subsidiaries and full for permanent establishment.
This relief will be temporary since the parent company (a resident taxpayer) will add back to its tax base, considering the amount of losses previously deducted, any subsequent profits made by its immediate subsidiaries or permanent establishments.
Furthermore, if the incorporation does not occur within a certain number of years, the deducted losses will be reincorporated automatically anyway.
As one of the objectives of CCTB proposal is to establish a corporate tax system that facilitates cross-border trade and investments and that improves the functioning of the Internal Market, the proposal also introduces theallowance for growth and investmentgranting deductions for financing costs of debt and equity within limits to avoid abuse and tax planning. According to the Article 11 of the CCTB proposal, taxpayers will be given an allowance for growth and investment according to which increases in their equity will be deductible from their taxable base subject to certain conditions, such as measures against potential cascading effects and anti-tax avoid- ance rules.
As its second aim—anti-tax avoidance function—the CCTB proposal includes provisions related to interest limitation, exit taxation, a general anti-abuse rule (GAAR), a switch-over clause, controlled foreign company legislation (CFC) and hybrid mismatch rules. Through these rules, profits should be taxed in place of “real economic activities”, which should combat aggressive tax planning.
Interest limitation rulesmentioned in Article 13 of CCTB limit the deductibility of interest (and other financial) costs, in order to discourage practices of profit shifting towards low-tax countries. The rule aims to allow the full deductibility of interest (and other financial) costs to the extent that they can be offset against taxable interest (and other financial) revenues. Any surplus of interest costs will be subject to deductibility restrictions, as determined with reference to a taxpayer’s taxable earnings before interest, tax, depreciation and amortization (EBITDA), particularly up to 30% of EBITDA or up to EUR 3 million, whichever limit is higher. The interest limitation shall not apply to financial undertakings, including those that are part of a consolidated group for financial accounting purposes.
Exit taxationmentioned in Article 29 of the CCTB proposal refers to the rule within the ATAD and ensures the taxation of the economic value of any capital gain created in Member States even though such a gain has not yet been realized at the time of the exit. The main objective is to prevent an arrangement whereby assets expected to generate high income are moved to low-tax jurisdictions for the purpose of being sold later and realizing capital gains that would be taxed at a low rate.
Based on Article 29, exit taxation is applied on accrued increases in value upon the transfer of the following:
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• assets from its head office to its permanent establishment in another Member State or in a third country
• assets from its permanent establishment in a Member State to its head office or another permanent establishment in another Member State or in a third country, to the extent that, owing to the transfer, the Member State of the permanent establishment no longer has the right to tax the transferred assets
• tax residence to another Member State or to a third country, except for those assets that remain effectively connected to a permanent establishment in the first Member State
• business carried out by its permanent establishment from a Member State to another Member State or to a third country, to the extent that, owing to the transfer, the Member State of the permanent establishment no longer has the right to tax the transferred assets.
TheGAARs44mentioned in Article 58 of the CCTB proposal are set in line with the text featured in the ATAD. Specifically, arrangements or a series thereof having been put in place for the essential purpose of obtaining a tax advantage that defeats the object or purpose of the CCTB Directive should be considered, for the purpose of calculating the tax base, with reference to their economic substance. Further, it must be noted that GAARs in the CCTB proposal constitute absolute rules, contrary to the GAARs introduced in the ATAD Directive as a minimum level of protection.
Moreover, to prevent discriminatory situations, it will be critical to ensure in practice that the GAARs apply to domestic situations, within the Union and vis-a-vis third countries in a uniform manner, so that their scope and results of application in domestic and cross-border situations do not differ.
The Switch-over Clause mentioned in Article 53 of the CCTB proposal is targeted at certain types of income originating in a third country; therefore, intra- EU situations are exempted from this rule. The aim of switch-over clause is to ensure that income is taxable in the European Union if it was taxed below a certain level in the third country. Specifically, a third country entity is subject, in its residence state, to a statutory corporate tax rate that is lower than half of the statutory tax rate that the taxpayer would have been subject to, in connection with such foreign income, in the Member State of its residence for tax purposes. In addition, if the switch-over clause is applied, a deduction of the tax paid in the third country shall be applied from its tax liability in the Member State where it is a resident for tax purposes. It must be underlined that the deduction shall not exceed the amount of tax, as computed before the deduction, which is attributable to the income that may be taxed.
Provisions related to theCFC rules are mentioned in Articles 59 (controlled foreign companies) and 60 (computation of the income of a controlled foreign company) of the CCTB proposal. They are in line the with ATAD and have the
44Generally, GAARs ensure that tax avoidance strategies that were not envisaged by the legislator can be addressed, by granting the authorities the power to deny taxpayers the benefit of aggressive tax-planning arrangements.
effect of re-attributing the income of a low-taxed controlled subsidiary to its parent company in an effort to discourage profit shifting (i.e., to ensure that profits parked in low or no tax countries are effectively taxed in the European Union). Moreover, CFC rules extend to the profits of permanent establishments where those profits are not subject to tax or are tax exempt in the Member State of the taxpayer.45
With respect to thehybrid mismatches46mentioned in Article 61 of the CCTB proposal, hybrid mismatches should normally occur within the framework of the common base and national or third-country corporate tax systems. The CCTB lays down rules whereby one of the two jurisdictions in a mismatch deny the deduction of a payment or ensures that the corresponding income is included in the common base.
To sum, the CCTB proposal with respect to the first step aims to ensure the common rules for calculating the corporate tax base in the European Union, including certain provisions against tax avoidance. The initiative directly effects companies47 falling under the mandatory scope, but there is also possibility for other companies to opt for the CCTB. However, all entities participating in CCTB system will subsequently participate in the CCCTB system. One of the motivations for entering into the system is a super-deduction of R&D costs as well as the possibility of cross-border loss relief. All these actions should bring economic benefits at least in the form of an increase in investment and employment of up to 3.6% and 0.5%, respectively in accordance with the impact assessment (2016).48In addition, the introduction of CCTB would, on average, save approximately 10% in compliance time and about 2.5% in compliance costs. However, about 60% of compliance costs remain unchanged, as they are related to transfer pricing, whose elimination is expected under the CCCTB regime through the second-step approach.
45For more details see Article 59 of CCTB proposal.
46Hybrid mismatches arise from differences in the legal characterisation of payments (financial instruments) or entities in different jurisdictions.
47It means a company meets all of the following conditions:
1. it takes one of the company forms listed in Annex I of CCT proposal;
2. it is subject to one of the corporate taxes listed in Annex II of CCTB proposal or to a similar tax subsequently introduced;
3. it belongs to a consolidated group for financial accounting purposes with a total consolidated group revenue that exceeded EUR 750,000,000 during the financial year preceding the relevant financial year;
4. it qualifies as a parent company or qualifying subsidiary and/or has one or more permanent establishment in other Member States.
48Commission staff working document, impact assessment, SWD(2016) 341 final.
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